Israel has barred Palestinian banks from making shekel deposits in Israel, as part of the state’s punitive measures against the Palestinian Authority in the wake of the collapse of peace talks and the reconciliation between Fatah and Hamas.

Meanwhile, the state-owned Israel Electric Corporation this week began to reduce its supply of electricity to East Jerusalem and the West Bank for two hours a day, citing the 1.5 billion shekels the PA owes it.

The IEC said it would cut the electricity supply to these areas by half each day between 1 P.M. and 1:30 P.M. and again from 7 P.M. to 7:30 P.M. Israeli settlements in the West Bank that would otherwise be affected will be provided with generators.

The IEC last week sued the Palestinian-owned Jerusalem District Electric Company to recover 531 million shekels ($154 million) in unpaid bills. JDECO supplies about 30% of Palestinians’ electricity, primarily in East Jerusalem and the West Bank towns of Bethlehem, Ramallah and Jericho. JDECO’s total debt is estimated at 950 million shekels, the balance is reported to be owed by the PA. In court, however, JDECO has asserted that it had paid 150 million shekels of the debt for which it is being sued.

The restrictions on Palestinian banking contacts, which have taken place routinely for decades, follow an Israeli inner cabinet resolution from April 24, the day the PA announced its reconciliation pact with Hamas. Among other things, Israel is withholding as much as 400 million shekels ($116 million) in tax revenues it collects every month on behalf of the PA.

On Wednesday the heads of the Palestine Monetary Authority, the Palestinian central bank, met with executives of West Bank commercial banks to decide how to proceed.

Israel has never before barred Palestinian banks from depositing funds in Israel.

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Based on agreements between the PA and Israel, the shekel is legal tender in the West Bank along with other currencies. The 1994 Paris Protocol, which Israel signed with the Palestine Liberation Organization, gives the PMA the right to convert excess cash received from West Bank Palestinian banks into foreign currency via the Bank of Israel and to exchange shekels for foreign currency and the reverse.

Former Bank of Israel Governor Stanley Fischer was careful to maintain correct relations with the PMA and worked to insulate relations with the authority from political or diplomatic policy. It is unlikely that the current limitation on bank deposits would have occurred while Fischer, who stepped down last June, was in office.

Palestinian commercial banks maintain active accounts with Israeli banks. Under the auspices of the Bank of Israel they have regularly transferred excess shekels and foreign currency to these accounts in order to conduct other financial transactions in Israel and abroad. The ban on transaction has left Palestinian banks with an excess of 300 million shekels on hand in monthly terms.

At their Wednesday meeting, Palestinian bankers said the Israeli move is strangling the Palestinian economy, forcing them to avoid accepting shekels from customers. If the sanctions continue much longer, the PMA may abandon the shekel as legal tender and curtail its ties with the Israeli banks and the Bank of Israel.

If the Palestinians lodge a complaint with the International Monetary Fund or the World Bank, it could also place Israel in a difficult situation.

The Bank of Israel and the Finance Ministry declined to comment for this report.

Haaretz.com, the online edition of Haaretz Newspaper in Israel, and analysis from Israel and the Middle East. Haaretz.com provides extensive and in-depth coverage of Israel, the Jewish World and the Middle East, including defense, diplomacy, the Arab-Israeli conflict, the peace process, Israeli politics, Jerusalem affairs, international relations, Iran, Iraq, Syria, Lebanon, the Palestinian Authority, the West Bank and the Gaza Strip, the Israeli business world and Jewish life in Israel and the Diaspora.